Thursday, May 26, 2011

Eight of the world’s top 10 most innovative companies of 2011 are in the ICT domain, reports a US based magazine Fast Company. Not surprisingly, all of these are product companies. While India is the largest exporter of ICT services, generating revenue of $76 billion from the IT sector, but products contribute to less than 2%. India’s contribution to technology innovation is negligible.The product companies witness non-linear growth (not proportionate to the head count)—the revenue per employee or profit per employee of Google or Microsoft is over 20 times that of India’s top services companies. Also, these technology giants serve as a beacon and are the undisputed trendsetters on the world technology road map.

Chinese companies such as Huawei and ZTE are the world’s leading telecom equipment providers. A report states that 45 of the world’s top 50 telecom companies use Huawei products. What more recognition is needed? These companies have full backing from the Chinese government and the government also supports R&D initiatives—for example, the TD-SCDMA technology that competes with the global wireless 3G standards. Is there an Indian company that can compete with Huawei/ZTE? India has lagged behind China and Taiwan in the capital-intensive electronics hardware manufacturing industry also. But the recent policy push from the department of IT to encourage semiconductor wafer fabrication, electronics and telecom product manufacturing is a welcome move. Also, Trai recently made a recommendation for promoting domestic manufacturing of telecom products.

The loss-making PSU Indian Telephone Industries, once the flagship telecom switch and telephone maker in the country, failed miserably during the telecom boom due to lack of vision from the government. But the case is different with ISRO, whose success could be attributed to the autonomy it enjoys. Another example of a tech-savvy initiative is the UID programme Aadhar, which, though far from fully implemented, has proved that India can implement large-scale technological projects.

Although the domestic demand for IT products is increasing, most Indian product companies are yet to penetrate the market. The only exception is the banking software industry where India has emerged as a leader in core banking solutions offered by Infosys and Oracle-India. Yet Infosys’s products business generates only about 5% of the overall revenue. In general, Indian companies are risk averse and prefer to enjoy the safety of services business, hence have not been able to succeed in creating product offerings.

But some Indian IT companies are successful in the outsourced product development (OPD) model, a pseudo ownership model, wherein the independent software vendors (ISVs) are involved in end-to-end product development for the customer but the ISV does not ‘own’ the product. Cloud computing can be a cost-effective and disruptive technology for further growth in OPD and pure-play product development companies. Nasscom indicates that delivery model innovations such as SaaS and innovative revenue models could fuel IT product adoption in future.

BERD (business expenditure on R&D) and patents/IP management are key indicators of a country’s technology innovation capability. An EU commission report on ICT 2011 indicates that India lags behind China and other emerging economies in terms of BERD/GDP. While China has seen a 10-fold increase in the number of patent applications over the past decade, India’s contribution is insignificant. Generating IPs and protecting them is just one part of the story. Realising value from the IP is a different ball game. Appropriateness of the solution is the key.

It must be said that Indian education system lacks an environment that fosters active partnerships between industry and universities. In the advanced countries, research in universities is given high priority and is supported by industry in the form of grants. As per the recent Anil Kakodkar Committee report, India lags way behind China in terms of university research in engineering and technology. The report also emphasises the need for improvement needed in research infrastructure. An OECD report indicates that India has less than one researcher per thousand employed, much below the global average.

Availability of risk capital is a key constraint for product companies to flourish but Nasscom sees an improving trend. Venture capital/angel investor ecosystem has improved significantly. There are 38 incubation centres across the country aimed at encouraging product development initiatives. India has seen 30% CAGR in start-ups over the past 10 years. The product market in India is expected to touch over $15 billion by 2015. The government’s plan to invest R25,000 crore for setting up semiconductor fabs will provide an impetus for hardware-oriented product development.

The government can play a key role in helping start-ups and other companies engaged in software or hardware product development. There are many examples of how government intervention has yielded good results. Tax benefits for software export revolutionised IT industry in India. Israel supported companies working on networking technologies that helped Israel take a leading position in security. Taiwan supported electronic hardware that resulted in the emergence of the original design manufacturer market.

India has been a ‘follower’ in the ICT space and its product development capability has been patchy. It needs to move towards full-fledged product development in order to be a dominant player in the ICT arena. India’s domestic market by itself will offer sizeable opportunities. However, for made-in-India to be a reality, it is imperative that the government aggressively drives a clear road map for technology innovation, encourages product initiatives, supports hardware and semiconductor industry and, most importantly, inculcates ‘product culture’ right at the universities.